Earnings Are Driving the Market but It’s Not Clear Where

The stock market’s swings over the last few weeks have been enough to give you whiplash.

For most of January, the Federal Reserve’s shift toward a tighter monetary policy, along with soaring inflation, were largely responsible for a fierce downward spiral in the market. The Fed still lurks in the background, but it hasn’t been the immediate cause of the gyrations this week.

Instead, a spate of earnings reports from giants like Meta (the parent company of Facebook and Instagram), Alphabet (the parent of Google), Exxon Mobil and Amazon have moved the market sharply, and in perplexing directions.

It is earnings season on Wall Street, a time for corporate executives to reveal how their companies performed in the last quarter of the year and to give clues on important changes in the corporate outlook for the year ahead. These executive comments, on earnings calls with analysts, usually provide color and texture about corporate behavior.

This level of detail may seem inconsequential if you are a long-term buy-and-hold investor who holds broad index funds that mirror the entire market. Who cares about the profit picture for one stock when your fund owns pieces of hundreds? In a steady market, the rise and fall of individual stocks can balance one another, to a large extent, and you may feel justified in dismissing the specifics as trivial.

Yet a sizable part of the economy, and all of the stock market, depend on the performance of these publicly traded companies. And right now, with the market and the economy in shaky positions, the corporate comments during earnings calls are setting off sharp movements in individual shares and in the overall market.

“The whiplash, and the extreme movements that we’re seeing, particularly on days when companies report earnings, is less about any extreme thing that is happening with those earnings and more about the background that the market lives in right now,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

The pandemic, the Fed monetary tightening in the face of soaring inflation, the withdrawal of enormous fiscal stimulus from the economy and the extremely high valuations of U.S. stocks after years of increases have all contributed to the market’s current vulnerability, she said.

The market has been punishing companies that have disappointed investors during their earnings calls more than it has been rewarding those bringing good news. Facebook, she said, is “sort of a poster child for a company that is being hammered because of its earnings report.”

Meta’s mammoth problems

Meta, which is what Facebook is now calling itself, has undergone an ordeal in the stock market that its shareholders can only regret. On Wednesday night after the market close, it disclosed information that was disturbing in at least three respects:

• It lost more than $10 billion in its Reality Labs division, an effort to build a virtual reality business in what it and other tech companies are calling the metaverse.

• It is having so much trouble selling ads on Apple devices because of privacy features installed by Apple that it is “facing a headwind” likely to cost it $10 billion in advertising this year.

• Its main Facebook app had fewer users at the end of the quarter than at the beginning, and it is having trouble generating revenue from the short Reels videos that it is promoting to compete with TikTok.

The stock market was appalled by what it heard, and on Thursday, Meta made history: Its shares lost 26.4 percent of their value in that one day alone. Depending on how you calculate the numbers, that amounted to a loss in market value of anywhere from $230 billion to $260 billion.

It was certainly “the largest destruction in market cap ever recorded” in one day, Bespoke Investment Group said in a note to clients.

Spectacular as the Meta debacle was, it is difficult to discern many enduring trends in the reaction to its particular problems, or, really, to many of the other earnings calls, except perhaps that companies that demonstrate the ability both to grow and to raise prices are highly prized in this inflationary environment.

Consider that investor aversion to Facebook on Thursday spread to other stocks, especially to tech and social media shares. The S&P 500 lost 2.4 percent for the day, its worst single-day performance since last February. Amazon was caught in the downdraft and lost far more, 8 percent, that day.

Yet Amazon rebounded smartly, after holding its own earnings event on Thursday.

Amazon issued a mixed report — including a decline in operating earnings that was offset by a gain in net income largely attributable to its partial ownership of the electric vehicle company Rivian. But what may have tilted the balance for Amazon investors was its decision, revealed during its earnings call, to use one of the many pricing levers at its disposal to generate more income.

It said it was raising the price of Prime shipping membership 16.8 percent for annual subscribers, to $139, from $119. Amazon is betting that people accustomed to frequent Prime deliveries, especially during the long pandemic, will absorb the cost rather than give up the regular supply of items arriving at their door.

A rally driven by price increases and supply chain logistics.

Until Meta’s fall, an upbeat mood had crept into the markets for four trading days, starting on Jan. 28. The S&P 500 gained 6.1 percent in its best four-day performance since November 2020.

Jan. 28 was the day when Timothy D. Cook, Apple’s chief executive, said on an earnings call that he expected the company’s supply chain problems to dissipate, for sales to keep roaring ahead and for gaudy profit margins to rise further.

With Apple setting the tone, the stock market rose until Wednesday, buoyed by a series of fairly upbeat earnings reports. They included:

• Exxon Mobil’s disclosure that, thanks to soaring oil and gas prices, it had earned the most profit in seven years.

• The declaration by Starbucks that it had raised prices and would keep doing so. “We have additional pricing actions planned through the balance of this year, which play an important role to mitigate cost pressures including inflation,” Kevin Johnson, the president and chief executive of Starbucks, said on a conference call.

• Alphabet's report that it was earning far more than Wall Street analysts had anticipated. Its fourth quarter profit reached $20.6 billion, an increase of 32 percent over the same period a year earlier.

That mini rally was a welcome reprieve after a dismal January, when the S&P 500 briefly plunged more than 10 percent — the territory that denotes a “correction,” a decline of moderate seriousness on Wall Street. There were a series of odd records: It was the worst January for that benchmark index since the financial crisis of 2009, and the worst month since March 2020, as much of the world shut down at the start of the coronavirus pandemic. Yet on Jan. 3, the first day of trading in 2022, the S&P 500, also reached a high-water mark, after climbing to a new high 70 different times in 2021.

The stock market’s direction has shifted, many times, already in 2022.

What should one make of these various, head-spinning records, and of the evident ephemeral influence of earnings calls?

I find them fascinating as an observer but irrelevant as an investor. Try to anticipate them at every step and you will eventually stumble. The market’s constant swings in response to corporate disclosures are, in my estimation,an argument for using index funds to invest in the entire global market, not in individual stocks.

Instead of worrying much about any single company, you hold a small share of all of them — in the hope that over the long run, the better performers will outweigh the weaker ones.

Whether that will be the case in the next year is questionable. U.S. stocks overall are still expensive and the supply of money in the economy is likely to be reduced, which could be a difficult combination for the stock market, especially in the United States.

You can understand these issues by taking the long view — looking at the economy as a whole, without ever focusing on the struggles and profits of specific companies. But these companies matter. Grasp the details and you may have a richer understanding of a vibrant but precarious economy.